FX Markets – Quiet But Wary

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Market Drivers for July 21 2014

Risk off flows resume as geopolitical risks and data weigh on thin markets

Nikkei closed Europe -0.57%

Oil $102/bbl

Gold $1315/oz.

Europe and Asia:

EUR GE PPI 0.0% vs.0.1%

EUR IT IP -2.1% vs. 3.6%

North America:

No data today

FX markets were very quiet in thin quasi holiday trade with Japan closed and economic calendar barren of any data. The geopolitical events continued to hover in the background as mild risk off flow dominated trade in Asian and early European trade.

Cable once again found sellers at the 1.7100 level and remains heavy as traders continue to fear that BoE will err on the side of caution with respect to monetary policy and keep rates at currents until 2015. On Friday rumors of a dovish interview with BoE chief Mark Carney quickly pushed the pair to 1.7040, but it rebounded when the central bank denied the report.

This week the focus will fall squarely on the BoE minutes with traders trying to gauge if there is any appetite for tightening on the MPC. If the committee remains in full agreement about rates cable could take a sharper tumble and start to test support near the 1.6900 level as profit taking kick in in earnest.

In Europe meanwhile the economic news continues to point to a slowdown as Italian Industrial Production printed much worse than expected at -2.1% versus 3.6% eyed. The news bodes badly for the EZ flash PMI readings due later this week, suggesting that the rebound in the periphery may have been short lived.

The recent geopolitical tensions could also play a major part in the dampening of demand as the diplomatic chill with Russia will no doubt have economic ramifications for Germany – the region’s largest economy. So far the euro has held above the key 1.3500 support, but the pair remains vulnerable to further downside action if the PMIs show significant deterioration.

Although US monetary policy remains accommodative, thus providing some support for the euro, the growing divergence between US and EZ economic performance is likely to make its impact felt on the pair as the summer wears on especially if there are growing indications of deflationary pressure in Europe. Today’s German PPI data came in at 0.0% versus 0.1% eyed suggesting that deflation remains a nagging problem in the region.

In North American trade today the eco calendar is empty and currency markets are likely to take their cue from equities. For now the financial remain quiet as listless summer trade is keeping all the majors in well confined ranges, but any further geopolitical shocks could quickly revive the risk off flows with EUR/USD 1.3500 level remaining vulnerable to attack once again.

Boris Schlossberg
Managing Director

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